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Previously, when estimating the budgetary effects of legislation regarding prescription drugs, CBO found insufficient evidence of an “offsetting” effect of prescription drug use on spending for medical services. Recently, CBO reviewed dozens of newer studies and determined that a body of research now demonstrates a link between changes in prescription drug use and changes in the use of and spending for medical services.

Consequently, in estimating the budgetary impact of future legislation that directly affects the use of prescription drugs by Medicare beneficiaries, CBO will project an offsetting effect on Medicare’s spending for medical services. Specifically, CBO estimates that a 1 percent increase in the number of prescriptions filled by beneficiaries would cause Medicare’s spending on medical services to fall by roughly one-fifth of 1 percent.

That conclusion is based on CBO’s review of recent research. It is discussed and explained in a report that CBO released today, Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services. This report provides background information about the relationship between prescription drug use and spending for medical services; reviews the literature on the size of the offsetting effect for the Medicare population; and describes how CBO synthesized the recent research. The report also provides an example of how CBO’s change in methodology will affect its cost estimates for proposals that would change prescription drug use by Medicare beneficiaries. The report is part of CBO’s continuing effort to explain the basis for its findings; so that Members of Congress, their staff, and outside analysts can understand the results and the methods used.

Tamara Hayford and Melinda Buntin of CBO’s Health, Retirement, and Long-Term Analysis Division wrote this report.